Why Goldman hiked oil forecast, cut growth call

For Goldman Sachs, the world increasingly appears to be revolving around oil prices. Oil prices rose Tuesday morning after the Wall Street investment bank boosted its 12-month forecast for Brent crude to US$130 a barrel from US$107. Brent futures were up as much as 1.5 % to US$111.72 a barrel, after a 2% drop while Canadian markets were closed Monday. Other commodities also caught a tailwind after the global markets shakeout on Victoria Day.

Goldman raised its forecasts, even as it has become less optimistic over global growth here’s why:

Growth may be slowing but is still ahead of non-OPEC production growth

The oil market is continuing to draw on inventories and OPEC spare capacity

Libyan production losses will lead to effective exhaustion of OPEC spare capacity by early 2012

Goldman raised its Brent crude forceasts to US$115, US$120, and USS$130 on a three, six and 12 month view.

At the same time, Goldman cut its China forecasts, two weeks after trimming its U.S. growth outlook (by about 50 basis points to 3.3% on average through end-2012) . In this circular world, higher oil prices will help to trim China’s growth to 9.4% from 10.0% for 2011 and to 9.2% from 9.5% for 2012. Inflation is also not coming down as quickly as expected and could require more tightening.

Goldman has been in overdrive with its oil forecasts — and fairly accurate so far. Earlier this spring it recommended investors sell oil and copper before the recent price slump took Brent 12% from its high on April 11. It also clearly believes the global economy is sitting on an oil price hair trigger.